On January 1, 2017, Pinnacle Corporation exchanged $3,200,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following
sheet:
Cash.................... | $ 122,000 | Accounts payable........ | $ 375,000 |
283,000 | Long-term debt.......... | 2,655,000 | |
Inventory................. | 350,000 | Common stock.......... | 1,500,000 |
Buildings (net)............ | 1,875,000 | 1,100,000 | |
Licensing agreements..... | 3,000,000 | $5,630,000 | |
$5,630,000 | |||
Pinnacle prepared the following fair-value allocation: | |||
Fair value of Strata (consideration transferred). | $3,200,000 | ||
Carrying amount acquired................... | 2,600,000 | ||
Excess fair value........................... | 600,000 | ||
to buildings (undervalued)................. | $300,000 | ||
to licensing agreements (overvalued)....... | (100,000) | 200,000 | |
to |
$ 400,000 |
At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 2018, Strata’s accounts payable included an $85,000 current liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata.
The separate financial statements for the two companies for the year ending December 31, 2018,
follow. Credit balances are indicated by parentheses.
Pinnacle | Strata | |
Sales......................................... | $ (7,000,000) | $(3,000,000) |
Cost of goods sold............................. | 4,650,000 | 1,700,000 |
Interest expense............................... | 255,000 | 160,000 |
585,000 | 350,000 | |
Amortization expense.......................... | 600,000 | |
Dividend income............................... | (50,000) | |
Net income.................................. | $ (1,560,000) | $ (190,000) |
Retained earnings 1/1/18....................... | $ (5,000,000) | ${1,350,000) |
Net income.................................... | (1,560,000) | (190,000) |
Dividends declared............................. | 560,000 | 50,000 |
Retained earnings 12/31/18.................. | $ (6,000,000) | $(1,490,000) |
Cash......................................... | $ 433,000 | $ 165,000 |
Accounts receivable | 1,210,000 | 200,000 |
Inventory...................................... | 1,235,000 | 1,500,000 |
Investment in Strata............................ | 3,200,000 | |
Buildings (net)................................. | 5,572,000 | 2,040,000 |
Licensing agreements.......................... | 1,800,000 | |
Goodwill...................................... | 350,000 | |
Total assets................................. | $ 12,000,000 | $ 5,705,000 |
Accounts payable.............................. | $ (300,000) | $ (715,000) |
Long-term debt................................ | (2,700,000) | (2,000,000) |
Common stock................................ | (3,000,000) | (1,500,000) |
Retained earnings 12/31/18..................... | (6,000,000) | (1,490,000) |
Total liabilities and OE........................ | $(12,000,000) | $(5,705,000) |
a. Prepare a worksheet to consolidate the financial information for these two companies.
b. Compute the following amounts that would appear on Pinnacle’s 2018 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.
- Subsidiary income.
- Retained earnings, 1/1/18.
- Investment in Strata.
c. What effect does the parent’s internal investment accounting method have on its consolidated financial statements?
Want to see the full answer?
Check out a sample textbook solutionChapter 3 Solutions
Soft Bound Version for Advanced Accounting 13th Edition
- The industrial enterprise "HUANG S.A." purchased a sorting and packaging machine from a foreign company on 1/4/2017 at a cost of €500,000. The useful life of the machine was estimated by the Management at ten (10) years, while the residual value was estimated at zero. For the transportation of the machine from abroad to the company's factory, the amount of €20,000 was paid on 15/4/2017. As the insurance coverage of the machine during transportation was the responsibility of the selling company, HUANG S.A. proceeded to insure the machine from 16/4/2017 to 15/4/2018, paying the amount of €1,200. The delivery took place on 15/4/2017. As adequate ventilation of the multifunction device is essential for its proper operation, the company fitted an air duct on the multifunction device. The cost of the air duct amounted to €2,000 and was paid on 20/4/2017. On 25/4/2017, an external electrician was paid €5,000 for the electrical connection of the device. The company also paid €5,000 to an…arrow_forwardI need answer typing clear urjent no chatgpt used pls i will give 5 Upvotes.only typing .arrow_forwardCash flow cyclearrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education